Fresh Perspective | By Tom Campanile and Mark Watson
In recent years, bank boards of directors have been approaching a tipping point in governance: regulators are pushing them further into overseeing strategy transformation, conduct and culture; and regulatory and other pressures challenge existing business models and the structures and operations that support them. Important obligations related to risk and regulatory reform continue to be heaped on top of long-standing board responsibilities, such as regulatory compliance.
Bank boards are now expected to oversee major changes in their institutions:
Multiyear transformations: This includes strategies, businesses, operating and structural models, and customer and digital transformations.
Overhauled approaches to risk governance: Regulators are pushing banks to strengthen frontline accountability, embedded risk appetite, controls effectiveness and culture.
Increased board responsibilities: Major emerging risks, notably cybersecurity, call for material board and senior management engagement.
Adding more directors and committees or increasing time commitments is no longer a viable long-term solution. If directors are to offer credible and constructive guidance amid significant changes taking place in their organizations, they’ll need a new approach.
Rethink How Boards Operate
Banks must transform their board operating model, much as the firms themselves are transforming. Banks are on the cusp of the third major overhaul of board practice in 15 years:
Reform 1: independence and internal controls: The post-dot-com upheaval catalyzed a major focus on audit committee responsibilities and enhanced the focus on internal controls around financial reporting (e.g., Sarbanes-Oxley) and effective whistle-blowing mechanisms. The epoch of lead directors or independent board chairs, coupled with the introduction of separate meetings of non-executive directors, enhanced board independence.
Reform 2: risk oversight and regulatory remediation: Since the financial crisis, banks have prioritized risk oversight with the introduction of risk committees, risk appetite frameworks, expanded stress testing, and more detailed and expansive risk reporting. The board and risk committee in particular have played a major role in overseeing the implementation of stronger risk governance approaches and of risk-related regulation.
Reform 3: strategy, conduct and culture: Now regulatory changes and other pressures are pushing boards to focus more on bank strategies and on the structure and operations that will support execution and expected future performance. The pace and scale of change in the industry require substantive board engagement. At the same time, regulators are indicating that the next major evolution needs to be in conduct and culture.
Expedite the Evolution
Bank boards must rework their agendas: Boards and committees need to have a systematic process to move regular agenda items into a business-as-usual (BAU) monitoring-and-oversight mode to allow time for dialogue about emerging issues. Regulatory updates should focus on material and thematic developments and implications, and banks must avoid getting mired in every specific rule or regulatory examination finding.
Directors must pay attention to areas that currently appear to be problem-free: This includes those initiatives, controls and risks that appear “green” in a firm’s dashboard but the success of which is critical – green can quickly turn to red.
Boards must adopt a more integrated oversight process: Though board committees are critically important, in some ways they have inadvertently contributed to some of the siloed thinking in firms. For example, the audit and risk committees oversee internal audit and compliance and risk, respectively. Yet who owns the three lines as an integrated program? This is important, given regulators’ recent push for strong frontline accountability for all risks inherent in the businesses and realigned and robust second and third lines. If management is to address these issues in an integrated manner, so too should boards.
Boards should establish time-limited oversight groups: Time-limited, less formal working groups can oversee the development and launch of major transformation plans and keep the entire board fully abreast of key issues, but can be disbanded as the project progresses and is successfully implemented and as the groups’ roles are absorbed into BAU structures. Such groups could be established by the full board or its committees.
Banks have to invest more in directors’ education: Do directors really understand what’s necessary to transform the bank’s operating model in today’s environment? Its digital strategy? Its three-lines-of-defense model? Its culture? More firms should invest in a more integrated, ongoing and stronger board training program – one that is truly tailored to the needs of their board and the bank and that doesn’t depend almost exclusively on training by management or generic outside events or conferences.
Dramatically different board risk reporting is required: Management is developing faster, more effective and more accurate ways to oversee performance, risks and controls through enhanced reporting. Boards need to acquire the same capabilities – not to micromanage the firm, but mainly to stay focused on the top issues, with details accessible for necessary interrogation, especially within committee dialogues. The goal is a better board-level management information system, not simply putting more on a tablet or using board portals.
Boards may need to consider previously rejected proposals: Over the past decade, boards have rebuffed several suggestions for board reform – most notably, full-time directors (those spending more than 75 days a year on those roles) and analytic support staff for boards. Both were rebuffed because they potentially overstepped the role of the board by bringing directors into the realm of management. It may be time to revisit these ideas and also to evaluate whether boards need dedicated internal staff. This can enable board engagement on the most important issues. Several firms already employ this approach.
The Boardroom in 2020
Many of these recommendations are already in practice at leading-edge firms. For many banks, however, the boardroom of 2020 will look very different from today’s. Some directors will devote much more time than others. Some committees will remain, and others will fade as they address and solve their focus issues. And meeting agendas will be materially different – fostering substantive dialogue on the most important issues of today and, more importantly, tomorrow. ■
Tom Campanile is a partner in and Mark Watson is executive director of Ernst & Young LLP’s Financial Services Office Advisory Services practice. They may be reached at firstname.lastname@example.org and email@example.com, respectively. For more information, please visit ey.com/rg2020.